Local government pension funds have increased allocation to alternative assets and bonds over the past three years while equities have fallen.
Research by State Street based on Pension Funds Online data for 105 local authorities across England, Scotland, Wales, and Northern Ireland shows total bond allocation rose from 11.9% in 2014 to 13.8% in 2016 as a proportion of total assets.
Meanwhile, equity allocation dropped from 50% in 2014 to 47.9% (£120.7bn) in 2016, and alternatives increased from 4.6% to 6.6% (£16.6bn).
The fall in equity exposure in percentage terms was primarily down to domestic equity allocation decreasing from 18% to 15.1% of total scheme assets, although there was a slight increase in overseas stocks to 24.8%.
Meanwhile, allocation to ‘other' investments such as inter alia, unit trusts, multi-asset vehicles, liability-driven investment solutions and structured products, fell from 33.4% of total assets in 2014 to 31.7% in 2016.
State Street Asset Owner Solutions head of UK pensions and banks Andy Todd (pictured) said from his conversations with investment committees, there is willingness to engage in more alternative asset classes. This is being driven by a search for return in a low yield environment, as well as diversification, he said.
Also, alternatives are a good fit given LGPS funds are still open defined benefit schemes with a very long-term investment time horizon. In the past three years the number of active members in the LGPS has risen by 138,784 to 2,174,128.
"When looking at asset portfolio beyond the monthly cash flow requirements, then the attractiveness of long-term investments that diversify core investments around bonds and equities and are a good match to liabilities, is a positive thing," Todd added.
The pooling of investments across 89 English and Welsh funds into eight vehicles is expected to enable greater accessibility to alternative asset classes, particularly small funds.
While Todd has not seen any evidence to suggest that asset allocation strategy has been restricted through lack of access to alternatives, buying power at the pool level will have a "very positive factor" particularly for those smaller funds.
Preparations for the pools are well underway to meet the April 2018 deadline for when they need to be set up by. Most pools are now working through the process for getting Financial Conduct Authority authorisation, and are expected to send applications to the regulator in the third quarter of this year.
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